Rational commercial behaviour – but not in the country’s best interests

Daniel Bentley, 29 April 2017

The housing market is ‘broken’, the government acknowledged in the housing white paper. In precisely what way it is broken, however, it was less clear. When Sajid Javid was asked by the Communities and Local Government Select Committee recently what had been meant by this, he pointed to the problem of high and still rising house prices. ‘That’s what I mean by broken,’ he said. But that is an outcome, not the source itself of the problem.

Helpfully, the cross-party CLG Committee puts its finger squarely on the problem in a report, Capacity in the homebuilding industry, published today. The market, it says, is not only dominated by a small number of volume builders who ‘are therefore able to shape how it operates’, but those builders ‘will not risk over-saturating a local market to the extent that house prices will fall and their profits decrease’:

‘This is rational commercial behaviour and a sound business model. But it is not one that is in the country’s best interests.’

The developers that gave evidence to the committee assured MPs that they build to demand. ‘If the demand is there, we will build houses to meet it,’ David Jenkinson of Persimmon told them. Of course they will – they are running a business. But as the committee points out, this is not the same as meeting need:

‘Our concern is that when developers say they build to meet demand, what they mean is that they build to meet demand at a certain price… the structure of the industry does not encourage them to deliver the increased supply of housing that is needed.’

Among various recommendations (including promoting small builders and council housebuilding), the committee recommends the government consider how it can influence the financial model that governs build-out rates. The housing white paper nibbled around this but did not confront it head-on. As housing minister Gavin Barwell told the committee, fairly, there is a danger that penalties for slow build-out rates create ‘a chilling effect’ on development, so it is essential to get the right balance.

To which the committee responds today: ‘It is disappointing that the white paper was not able to suggest how this balance could be struck.’ Ouch.